Hypothecation involves linking specific expenditure to an explicit revenue source and the Deputy will be aware that it is not a feature of the Irish tax system in general. It is only used in limited circumstances where there is a strong justification because it can cause difficulties for the efficient and effective management of the public finances. Furthermore, it also exposes specific expenditure dependent solely on a hypothecated revenue to any volatility associated with the revenue source in question. The Department of Finance is generally opposed to the hypothecation of revenue funds as it reduces the flexibility of the Government to prioritise and allocate funds as necessary at a particular time. Taxation and expenditure decisions should be driven by their overall effectiveness in line with sound and sustainable budgetary principles. Accordingly, ring-fencing revenues may constrain expenditure decisions and can distort the allocation of resources resulting in reduced value for money. It is often argued that hypothecation may increase public support for new or existing taxes though linking the tax or charge to a specific objective and by ring-fencing the revenues that arise from the charge for a number of specific purposes. However, the tax base can be volatile and/or erode over time - particularly in the case of health or environmental taxes designed to prompt behavioural change.
Nonetheless there are a number of instances where an approach of this nature has been adopted. The Deputy will appreciate that it is not possible within the format of a single PQ reply to list all previous taxes or levies in tax history that have been ring-fenced for a specific purpose. Relevant examples related to my Department are listed below, however it should be noted that not all of these would strictly meet the definition of “tax”:
- The Pay Related Social Insurance (PRSI). This charge is collected by the Revenue Commissioners and used to fund the Social Insurance Fund which is administered by the Department of Employment Affairs and Social Protection which pays for various social welfare benefits and pensions. 0.8% of certain employer PRSI contributions goes to the National Training Fund, another separate fund that is available to the Department of Education for higher education and further education and training.
- Section 157 of the Finance (Local Property Tax) Act 2012, as amended, provides for the Minister for Finance to pay from the Central Fund into the Local Government Fund (‘LGF’) an amount equivalent to the local property tax paid into the Central Fund during the financial years 2014 to 2017. Following the enactment of the Water Services Act 2017, the Revenue Commissioners are now required to pay directly into the LGF an amount equivalent to the local property tax received by them, commencing with the year 2018. These accounting mechanisms are not strictly a form of hypothecation, as while the legislation specifies where the LPT funds are to be transferred, local authorities retain discretion as to how their LPT allocation is spent. The only exception to this applies to those local authorities that receive a greater level of LPT funding than was previously allocated in the form of general purpose grants. Those authorities, of which there are nine, are required to use a portion of their LPT funding to self-fund certain housing and roads programmes in lieu of exchequer funding.
- The community rated private health insurance system is underpinned by the Risk Equalisation Scheme. The Scheme involves a community rating levy collected as a stamp duty by the Revenue Commissioners from insurers in respect of all health policies written. All of the monies collected are paid over to the Risk Equalisation Fund administered by the independent regulator - the Health Insurance Authority. The Authority then redistributes the fund back to the market through credits payable to insurers in respect of insured lives to offset some of the additional cost of insuring older and less healthy members. The Scheme is Exchequer neutral, neither a cost nor a benefit to the State.
- €168 million of the Tobacco Products Tax has been paid as an Appropriation-in-Aid to the Department of Health since Budget 1999.
- Motor Tax was paid into the Local Government Fund (this was the case up until end 2017, motor tax is now brought to account in the Exchequer).
- Section 12 of the Horse and Greyhound Racing Act 2001 provided that the Horse and Greyhound Fund would each year be financed by an amount equal to the revenue from excise duty on off-course betting in the preceding year or the year 2000 funding levels increased by reference to the Consumer Price Index, whichever was greater. This formula applied for the years 2001-2008. However since 2009, the level by which the Fund is to be increased has been decided by the Minister for Agriculture.
- The Insurance Compensation Fund (ICF) was established under the Insurance Act 1964, as amended, in order to provide a certain minimum level of protection for policyholders particularly where an insurer goes into liquidation. In essence the ICF is a consumer protection mechanism which is also found in Member States across the EU and elsewhere. The ICF is currently maintained and administered under the control of the President of the High Court acting through the Accountant of the Courts of Justice. The ICF is funded by a levy on non-life insurance policies. There are some exclusions to this such as health and marine insurance policies. The current ICF levy has been in place since it was re-introduced on January 1st 2012 and was put in place because of the insolvent nature of Quinn Insurance and the need to protect the policyholders of the company. Prior to its re-introduction, the levy was applied once before, between 1984 and 1993, to meet the liabilities of an insolvent insurer following the collapse of PMPA. On the 4th November 2011 the Central Bank of Ireland published a levy notice requiring non-life insurance companies to pay a 2% levy on insurance premiums in respect of new business and renewals with an inception date on or after 1st January 2012. This notice remains in force until amended by a further notice. The 2% levy is calculated as a percentage determined by the Bank based on the aggregate of the gross premiums paid to insurers in respect of policies issued in relation to risks in the State. The current ICF levy generates in the region of €70 million per year. To date, the Exchequer has advanced in excess of €1 billion to the ICF on which a commercial rate of interest is applied. Until all advances outstanding from the Exchequer to the ICF are fully repaid, continued financial support for the ICF in the form of a levy will be required.
- Lighthouse dues are collected by Revenue (€6m in 2017) and sent to the Department of Transport, Tourism and Sport.
- For the environmental levy on plastic bags – provided for under Department of Communications, Climate Action and Environment legislation – Revenue collected €7m in 2017.